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Australia: ATO official outlines transfer pricing areas of focus

Australia: ATO official outlines transfer pricing areas

The Australian Taxation Office (ATO) released the Second Commissioner’s remarks in an address presented at the Tax Institute’s National Transfer Pricing Conference held in Sydney on Wednesday, 14 August 2019.

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In the address, the Second Commissioner spoke of the ATO’s ongoing focus on transfer pricing due to its importance to the Australian taxation system—in particular, comments on focus areas and “transfer mis-pricing traps” which provided some key insights on what could attract the ATO’s attention.

Focus areas

Inbound supply chains, related-party loans, and marketing hubs were key areas the ATO had directed its attention of late.

The ATO had recently signaled its focus on inbound supply chains, prompted by what had been observed as being a “race to the bottom in terms of the profit landed in Australia.” The Second Commissioner stated that:

Not only was this inappropriately reducing Australian tax, but also clogging up our APA processes with ambit claims, adversely affecting taxpayers with genuine prices seeking certainty.

Concerning related-party loans, the Second Commissioner said: “we have brought about $80 billion in previously high risk related party loans into low risk or ‘green zone’ arrangements, and expect this to increase as we resolve existing issues.”

The Second Commissioner also noted that the ATO had started to make inroads with its hubs strategy, stating that the tax authority was seeing a reduction on the use of these arrangements.

Transfer “mis-pricing” traps

The Second Commissioner continued by listing a number of the traps that had been encountered, including:

  • Pricing a contractual arrangement that does not reflect what is happening in reality
  • Entering into transactions or restructures against the best interests of the Australian entities, for example:
    • Entering into a worse transaction with a related party than could be obtained with a third party (or in fact was previously in place with a third party)
    • Engaging in contractually artificial allocations of risk and reward that would never occur in the real world (described as the “kidney donor” approach to transfer pricing, “just because you can point to someone living a full life on dialysis, this doesn’t support a proposition that someone would remove their own kidneys and go on dialysis in order to transfer the risks and rewards of their kidneys to someone else”
  • Transferring intellectual property to a related party just before it becomes commercially viable at a significant discount to what it would be worth
  • Attempting an optimistic use of one methodology, with no cross-checking against other methodologies

The Second Commissioner concluded his speech with reminders to consider whether the transaction at issue makes commercial sense and, if it does not, not simply pricing a non-commercial transaction and to look at multiple methodologies to see if the price makes sense. 

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